As European skies darken with the storm clouds of geopolitical tensions, particularly the shadow cast by Russia’s war against Ukraine, a stark dilemma has emerged on the horizon for the continent’s asset managers. This quandary, deeply rooted in the ethos of sustainable investment principles, challenges the very fabric of Environmental, Social, and Governance (ESG) advocacy. The question that now looms large is whether investments in the defence industry can be harmonised with the steadfast commitment to sustainability.
This critical debate, underscored by leading voices in Europe’s financial sector such as Philippe Gijssels of BNP Paribas Fortis and Jürgen Verschaeve of KBC Asset Management, sits at the precarious intersection of ethical investing and the pragmatic necessities of national security. Their insights, shared at pivotal gatherings like the Trends Investment Summit in Brussels, underscore the gravity of the situation—a turning point that could very well dictate the trajectory of ESG investing in an era marked by uncertainty.
Needed: 354 billion euro, annually
Amid these discussions, the collective defence spending by the 27 EU member states emerges as a significant factor. Aligned with the NATO guideline of allocating 2% of GDP to defence, this amounts to a staggering sum of approximately 354 billion euros annually. This financial commitment underscores the scale of Europe’s investment in its security infrastructure, presenting a complex backdrop for ESG-oriented asset managers wrestling with the ethical implications of defence investments.
Gijssels eloquently highlighted the dilemma during a panel, noting, «It’s a very important discussion. One that will - without being too dramatic - determine our future.» He captured the essence of the debate: the dichotomy between a commitment to ESG principles and the imperatives posed by geopolitical adversaries.
Corruption and bribery
Verschaeve’s comments brought the ‹S› (Social) and ‹G› (Governance) aspects of ESG into sharper focus, particularly the thorny issues of corruption and bribery that might mar the defence sector. This underlines the complexity of aligning defence investments with ESG criteria, a task that demands not only a meticulous approach but also a consensus that spans across Europe.
The ethical and strategic considerations at play are manifold. On one side, there’s the imperative to bolster national security in the face of tangible threats; on the other, the commitment to uphold the principles of environmental stewardship, social responsibility, and governance. The invasion of Ukraine by Russia serves as a grim reminder of the stakes involved, urging a reevaluation of investment priorities.
Gijssels› invocation of geopolitical challenges, with specific nods to leaders like Putin and Xi, brings the debate into the realm of realpolitik. Europe’s need for a robust defence mechanism is undeniable, yet this need must be weighed against the foundational tenets of ESG investing. How do we reconcile these at times conflicting priorities?
Need to redefine ESG criteria?
The answer may lie in a nuanced approach that redefines ESG criteria for the defence sector, emphasising ethical governance, anti-corruption measures, and the development of technologies that mitigate collateral damage. Moreover, by broadening the concept of security to include cyber, energy, and economic facets, investments can be aligned more closely with ESG principles while still contributing to overall security.
Engagement with stakeholders is crucial in this context. Dialogue with investors, policymakers, and defence companies is essential to foster ethical practices, transparency, and accountability within the defence industry.
As we stand at this crossroads, the choices made by Europe’s asset managers will not only determine the future of ESG investing but also reflect our collective values in the face of global challenges. This is not merely a question of financial returns but a matter of shaping an investment landscape that recognises the broader impacts of its decisions. In this era of ESG, the path forward requires both wisdom and courage, balancing the imperatives of security with the principles of sustainability.
Raymond Frenken, as Managing Editor International at Investment Officer, offers this reflection not just as an analysis but as a call to thoughtful action in these turbulent times. While his views are personal, they invite to a larger conversation about the future of investing in a world increasingly defined by its challenges. Email him at raymond.frenken@investmentofficer.com.